WASHINGTON (Reuters) - U.S. regulators have reached the closing phase of “stress tests” to gauge the health of the nation’s top banks, and are bracing for a battle to get those firms to accept tough appraisals.
Officials realize it may be hard to keep the assessments under wraps, and they are looking for ways the banks could disclose some details without causing havoc in the markets, regulatory sources say. If a bank needs more capital, any disclosures would likely come in concert with a recovery plan that could include government aid and private assistance.
“There will be definitely be some information that will be provided at the end of it, but exactly what that will be, and when it will be provided, will come forth later,” Comptroller of the Currency John Dugan, who supervises some of the nation’s largest banks, said on Tuesday on the sidelines of a bank conference.
The stress tests at the nation’s 19 biggest banks are part of a wide-ranging effort to restore stability to a sector wracked by huge mortgage-related losses. Another key plank is a public-private program to buy toxic assets from banks, which aims to clear the way for them to attract private capital.
Bank share prices, which dropped 50 percent last year, have fallen a further 35 percent so far this year. Investors have worried that mounting losses could lead the government to take firmer control of some institutions, if not to nationalize them outright.
Shares at Citigroup and Bank of America, two recipients of government bailout packages, have been particularly hard hit.
“I think these banks are going to be staring at some big shortfalls. If there had been a way to paper over this, the government would have done that by now,” said Dean Baker, co-director of the Center for Economic and Policy Research.
The regulatory stress tests announced by the U.S. Treasury on February 10 aim to determine how much capital the largest banks might need should the economy’s performance turn out to be much weaker than expected.
When the tests are completed at the end of April, banks found to be undercapitalized will be pushed to raise money from private sources or turn to the Treasury, which will be able to pump in capital from its $700 billion financial rescue fund.
The Treasury has said it has about $135 billion in its rescue fund that has not yet been committed. But some analysts question whether that will be enough, and the Obama administration could face the unpleasant task of asking a bailout-weary Congress for more funds.
The administration hopes to avoid heavy intervention — and a big financial outlay — by attracting private capital to the banks, and it expects the stress tests and the toxic asset plan to work in tandem.
The Treasury aims to have the toxic asset program up and running within two months, and a need to raise fresh capital could lead some banks to unload assets at prices they deem too low in order to present a cleaner balance sheet to investors.
Regulators, however, are prepared to use pressure to get other banks to accept discounted prices for their assets. They could demand banks raise more capital, set aside more money for loss provisioning, or seek merger partners.
U.S. officials have also said it behooves banks to clean up their balance sheets now so they can attract private money instead of government funds that can come with unwanted conditions. The administration’s removal of General Motors’ Chief Executive Rick Wagoner served as a chilling example.
In the meantime, bank examiners are struggling in the stress tests to get banks to accept that they are valuing assets on their books too highly, according to bank industry sources. Many of the banks have completed their own stress tests, and regulators will soon sit down with the banks’ management to reconcile the differing results, these sources said.
Bank sources say that while their dealings with regulators have been cordial, they are concerned that searing government reports will damage their reputation and chances of recovery.
Bankers also fret about the government’s time horizon for the firms’ health. Most of the short-term woes faced by banks can be resolved by the end of the crisis, the bankers say.
“Strictly speaking, many banks are insolvent now. In the long run, though, we can pass any test, so how much time do we have?” a banking source familiar with his firm’s stress test work said.
Reporting by Karey Wutkowski and Patrick Rucker; Editing by Jonathan Oatis